The Air is Still Good at Air Products and Chemicals

by Dividend Growth Investor | June 29, 2012 1:30 pm

The Air is Still Good at Air Products and Chemicals

Air Products and Chemicals (NYSE:APD[1]) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend aristocrat[2] has paid distributions since 1954 and increased dividends on its common stock for 30 years in a row.

The company’s last dividend increase was in March 2012 when the Board of Directors approved a 10.30% increase[3] to 64 cents per share. The company’s largest competitors include Airgas (NYSE:ARG[4]), Praxair (NYSE:PX[5]) and Air Liquide (PINK:AIQUY[6]).

Over the past decade this dividend growth stock[7] has delivered an annualized total return of 7.10% to its shareholders.

[8]

The company has managed to deliver 10% in annual EPS growth since 2002. Analysts expect Air Products to earn $5.57 per share in 2012 and $6.35 per share in 2013. In comparison Air Products earned $5.59 per share in 2011.

[9]

Air Products is expected to post a 5% growth in sales, due to strong demand for industrial gases in rapidly growing economies in Asia. Long term growth will be driven by acquisitions, expansion into rapidly growing markets in South America and Asia. In addition, new business initiatives such as its Tonnage Gases Business will lead to 10% to 15% increases in EPS by 2013.

While European divisions have been operating in a tough environment, Air Products is attempting to streamline operations and manage costs strategically.

The return on equity has increased from 16% in 2002 to 22% in 2011. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

[10]

The annual dividend payment has increased by 11.70% per year over the past decade, which is higher than to the growth in EPS.

[11]

A 12% growth in distributions translates into the dividend payment doubling every six years. If we look at historical data, going as far back as 1985 we see that Air Products has managed to double its dividend every seven years on average.

The dividend payout ratio remained at or below 40% over the past decade, with the exception of two brief spikes in 2003 and 2009. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

[12]

Currently, Air Products is attractively valued[13] at 14 times earnings, yields 3.20% and has an adequately covered dividend. I would consider adding to my position in the stock subject to availability of funds.